October 26, 2010

Economics for Edu-pundits: Part V

Before I address the many fine issues raised in the battle raging over in the comment section of Part IV, I want to address the currently preferred organization for education entities, including universities, most private schools, and most charter schools –the dreaded non-profit organization.

We have seen that the role of profit-seeking businesses is better understood when they are recognized as profit-and-loss businesses, with all the pressures and incentives created by these dual potentialities. By the same token, what are called "non-profit organizations" can be better understood when they are seen as non-profit and non-loss institutions—that is, institutions which operate free of the constraints of a bottom line.

That freedom from turning a profit has resulted in the same kind of stagnation we see in our public schools which are basically organized along non-profit lines as well.

Freedom from the bottom line does not mean that non-profit organizations have unlimited money. It just means that, with whatever money they do have, non-profit organizations are under very little pressure to achieve their institutional goals to the maximum extent possible with the resources at their disposal. Those who supply those resources include the general public, who cannot closely monitor what happens to their donations or their taxes, and those whose money provided the endowments that help finance non-profit institutions Much or most of these endowments were left by people who are now dead, who cannot monitor at all.

What would be called "losses" in other kinds of enterprises are called "deficits" in non-profit organizations and serve as reasons given when seeking donations or government subsidies to cover shortfalls. Non-profit organizations have additional sources of income, including fees from those who use their services, such as visitors to museums, audiences for symphony orchestras, and tuition from students. These fees are in fact the main source of the more than half a trillion dollars in revenue received annually by non-profit organizations in America. However, these fees do not cover the full costs of their operation—which is to say, the recipients are receiving goods and services that cost more than these recipients are paying and some are receiving them free. Such subsidized beneficiaries cannot impose the same kind of economic discipline as the customers of a profit-and-loss business who are paying the full cost of everything they get.

Adam Smith noted how academics running universities financed by endowments can run them in self-serving ways, being “very indulgent to one another,” so that each academic would “consent that his neighbor might neglect his duty, provided he himself is allowed to neglect his own.” Tenure granting lifetime appointments are common in non-profit colleges, but practically unknown in businesses that must meet the competition of the marketplace.

The fact that some organizations’ income is called profit and other organization’s income is not does not change anything economically, however much it may suggest to the unwary that one institution is greedy and the other is not.

It is the non-profit organizational nature of private schools and charter schools that has contributive to the less than ideal competitive state affairs. Charter schools are most newly entities, run by activists (not businessmen), and typically thinly capitalized. Moreover, they operate in a somewhat hostile highly regulatory environment with many regulations that tend to coerce these new entities into conforming to the current practices of public schools. We are still a long way from a competitive market in education even with the presence of charter schools.

The line between For-profit Corporations and Not-for-Profit Corporations in Education has grown very thin. We have non-profits like ETS owning For-Profit Corporations. and we have Corporate moguls protecting their profits with non-profit corporations that do not pay taxes. The Education Venture Capitalists are using the tax-protected money to arrange for what amounts to leveraged buyouts of state and local public schools.

Non-profit corporations do have to account for their expenditures. And if they have a loss they go out of business just as For profits do.

non-profit organizations are under very little pressure to achieve their institutional goals to the maximum extent possible with the resources at their disposal

That just doesn't match my expeerience, Ken. I've worked on both sides of the Corporate fence and I've observed what goes on in each pasture. By and large, people cope as well as they can with what they can. You can match every feature on one side of the fence with the same feature on the other side.

It seems to me there are two distinguishing features. One is systemic. The institutional elements in the for profit world are tightly coupled, while the institutional elements in the non-profit world are very loosely couple and at times are altogether uncoupled.

The other is economic. Non-profit institutions are either public or IRS 501c(3)--meaning that they are exempt from paying tax. This means that they are always under some form of bureaucratic control.

As you say, these controls are lax. We can invent better controls, but little effort has been devoted to that end.

The Tax-paying Corporations (along with individual tax-payers keep the public show on the road. They can form the organizational structure of choice and have personal/organizational control of their cash flow.

In elhi the language and culture does not split along these structural lines. In elhi the language is largely rhetorical rather than technical and the culture is largely aspirational.

There is about as much bullshit in corporate language. But tjhe culture is largely grounded in technical language and functions operationally.

Advances in the Corporate world are largely based on R&D. In the Elhi world, research is regarded as a benefit rather than a cost, and there is no "D" to speak of.

If and when the government gets around to examining the tax system it would be a good idea to include the non-profit sector and the financing of elhi in the examination.

(Schutz): " The institutional elements in the for profit world are tightly coupled, while the institutional elements in the non-profit world are very loosely couple and at times are altogether uncoupled."

What do you mean by "coupled"?

(Schutz): "The other is economic. Non-profit institutions are either public or IRS 501c(3)--..."

(Schutz): "...meaning that they are exempt from paying tax. This means that they are always under some form of bureaucratic control."

Unclear. Among the organizations listed in the link above, some may have no internal bureaucracy at all (a community homowners association, for example). If you mean that the IRS and police bureaucracy that applies to everything else applies to them, too, well, yeah. But that's not saying much. Sometimes that bureaucracy is too busy elsewhere to apply oversight. Thank Odin.

Re tax-exempt:I'm not a lawyer, and the intricacies of the IRS Tax Code aren't relevant to the point I'm trying to make. Education tax-free institutions are (c)3. They are always under some form of bureaucratic control. The other 501 categories aren't relevant to the thread.

I was trying to say that "turning a profit" and "lack of a bottom line" and such, are not the key considerations in determining the instructional accomplishments of students, teachers or schools.

About D-Ed Reckoning

The primary problem with K-12 education today is the problem of dead reckoning--an estimate based on little or no information. We don't know what a good K-12 education system is because we've never seen one operating. A good education system is one that is capable of educating almost every child.